INTERMEDIATE ACCOUNTING 2
FINAL EXAMINATION
MULTIPLE CHOICE (Please show your solutions)
A. Kabeegooan Company provided the following information on December 31, 2020:
Cash in bank, net of bank overdraft of P500,000
Petty cash, unreplenished petty cash expenses P10,000
Notes Receivable
Accounts receivable, net of customer’s accounts with
credit balances of P1,500,000
Inventory
Bond sinking fund
5,000,000
50,000
4,000,000
Total Current Assets
21,050,000
Accounts payable, net of suppliers’ account with
debit balances of P1,000,000
Notes Payable
Bonds payable due June 30, 2018
Accrued expenses
7,000,000
4,000,000
3,000,000
2,000,000
Total current liabilities
16,000,000
6,000,000
3,000,000
3,000,000
1. What amount should be reported as total current assets on December 31, 2020?
a. 19,040,000
b. 20,040,000
Solution:
Cash in Bank (5,000,000 + 500,000)
Petty cash (50,000-10,000)
Notes receivable
Accounts receivable
Inventory
Total Current Assets
c. 20,050,000
d. 24,040,000
5,500,000
40,000
4,000,000
7,500,000
3,000,000
20,040,000
2. What amount should be reported as total current liabilities on December 31, 2020?
a. 19,000,000
b. 16,000,000
c. 15,500,000
d. 15,000,000
B. In packages of the products, Kurrant Company included coupons that may be presented at retail
stores to obtain discounts on other Kurrant Products.
Retailers were reimbursed for the face amount of coupons redeemed plus 10% of that amount for
handling costs.
The entity honored requests for coupon redemption by retailers up to three months after the consumer
expiration date.
The entity estimated that 70% of all coupons issued would ultimately be redeemed. The consumer
expiration date is December 31, 2021. The total face amount of coupons issued was P600,000 and the
total payments to retailers during 2021 amounted to P220,000.
1. What is the premium expense for 2021?
a. 600,000
b. 180,000
c. 462,000
d. 198,000
2. What amount should be reported as liability for unredeemed coupons on December 31, 2021?
a. 308,000
b. 200,000
c. 242,000
d. 0
Solution: Face amount of coupons to be redeemed
(70%*600,000)
Multiply by (100% face plus 10% handling costs)
Total Coupon Liability/ Premium expense
Less: Coupons redeemed
Liability for unredeemed coupons
P420, 000
110%
P462, 000
(220,000)
P242, 000
C. Alainne Company, a grocery retailer operates a customer loyalty program. The entity grants
program members loyalty points when they spend a specified amount on groceries.
Program members can redeem the points for further groceries. The points have no expiration date.
During 2019, the sales amounted to P7,000,000 based on stand-alone selling price. During the year, the
entity granted 10,000 points. But management expected that only 80% or 8,000 points will be
redeemed.
The stand-alone selling price of each loyalty point if P100.00.
One December 31, 2019, 4,800 points have been redeemed.
In 2020, management revised its expectation and now expected that 90% or 9,000 points will be
redeemed altogether.
During 2020, the entity redeemed 2,400 points.
1. What amount should be reported as sales revenue including the revenue earned from points for
2019?
a. 7,000,000
c. 6,125,000
b. 8,000,000
d. 6,650,000
Solution:
Product Sales (7,000,000/8,000,000*7,000,000)
P6,125,000
Revenue to be recognized (4,800/8000*875,000)
525,000
Total sales revenue
P6,650,000
2.
What is the revenue earned from loyalty points for 2020?
a. 700,000
c. 175,000
b. 210,000
d. 200,000
Solution:
Product Sales
P7,000,000
Points-Stand alone selling price (10,000*100)
1,000,000
Total
P8,000,000
Product Sales (7,000,000/8,000,000*7,000,000)
Points (1,000,000/8,000,000*7,000,000)
Total Transaction Price
Redemption of 4,800 points in 2019
Revenue to be recognized (4,800/8000*875,000)
Redemption of 2,400 points in 2020
Points redeemed in 2019
Points redeemed in 2020
Total points redeemed to December 31, 2020
P6,125,000
875,000
P7,000,000
P 525,000
4,800
2,400
7,200
Cumulative revenue on December 31, 2020
(7,200/9,000*875,000)
P 700,000
Revenue recognized in 2020
( 525,000)
Revenue to be recognized in 2021
P 175,000
D. Regal Department Store sells gift certificates, redeemable for store merchandise and with no
expiration date.
The entity provided the following information pertaining to the gift certificate sales and redemptions:
Unearned revenue on January 1, 2020
2020 sales
2020 redemptions of prior year sales
2020 redemptions of current year sales
750,000
2,500,000
250,000
1,750,000
On December 31, 2020, what amount should be reported as unearned revenue?
a. 1,250,000
b. 1,125,000
c. 1,000,000
d. 500,000
Solution:
2020 sales
P2,500,000
Add: Unearned revenue on January 1, 2020
750,000
Total unearned revenue
P3,250,000
Less: 2020 redemptions of current year sales P1,750,000
2020 redemptions of prior year sales
250,000
1,750,000
Total unearned revenue as of December 31, 2020
P1,250,000
E. Cobb Company sells appliance service contracts is agreeing to repair appliances for a two-year period.
The past experience is that, of the total spent for repairs on service contracts, 40% in incurred evenly
during the first contract year and 60% evenly during the second contract year.
Receipts from service contract sales are P500,000 for 2019 and P600,000 for 2020.
Receipts from contracts are credited to unearned contract revenue. All sales are made evenly during
the year.
1.
What is the contract revenue for 2019?
a. 100,000
c. 250,000
b. 200,000
d. 500,000
Solution:
Service contract sales
500,000
Multiply to 40%
40%
Contract revenue for 2019
200, 000
2. What is the unearned contract revenue on December 31, 2019?
a. 300,000
b. 400,000
Solution:
[(500,000*.60)1 ½ years]= 150,000
3.
What is the contract revenue for 2020?
a. 240,000
b. 360,000
Solution:
Service contract sales
Multiply to 60%
Contract revenue for 2019
4.
c. 200,000
d. 150,000
c. 370,000
d. 250,000
600,000
60%
360,000
What is the unearned contract on December 31, 2020?
a. 360,000
b. 470,000
Solution:
600,000 x 40% x ½ = 120,000
600,000 x 60%=360,000
=480,000
150,000+480,000= 630,000
c. 480,000
d. 630,000
PROBLEMS:
A. Marbel Company was authorized to issue 12% bonds with face amount of P5,000,000 on April 1,
2020. Interest on the bonds is payable semiannually on April 1 and October 1. Bonds mature
on April 1, 2025.
The entire issue was sold on April 1, 2020, at 98 less bond issue cost of P50,000.00
On July 1, 2021, bonds of P2,000,000 face amount were purchased and retired at 99 plus
accrued interest.
REQUIRED:
1. Prepare journal entries including any adjustments relating to the issuance of the bonds for 2020
and 2021. (use memorandum approach and the straight line method of amortization)
2. Present the bonds payable in the statement of financial position on December 31, 2021.
Solutions:
1)
2020
Apr. 1
Cash
Discount on bonds payable
Bond issue cost
Bonds payable
4,850,000
100,000
50,000
5,000,000
Oct. 1
Interest expense
Cash
Dec. 31
Interest expense
150,000
Accrued interest payable
150,000
(5,000,000*12%*3/12=150,000)
31
2021
Jan. 1
300,000
300,000
Interest expense
15,000
Discount on bonds payable
15,000
(100,000/5 years=20,000 annual amortization*9/12)
Accrued interest payable
Interest expense
150,000
150,000
Apr. 1
Interest expense
Cash
300,000
300,000
Jul. 1
Interest expense
10,000
Discount on bonds payable
10,000
(100,000/5 years=20,000 annual amortization*1/2)
1
Bonds payable
Interest expense
Loss on early retirement of bonds
Cash
Discount on bonds payable
Discounts on bonds payable
Less: Amortization from April 1, 2020
To July 1, 2021 or 15 months
(15/60*100,000)
Balance, July 1, 2021
2,000,000
60,000
10,000
2,040,000
30,000
100,000
25,000
75,000
a. Total Cash Payment
Retirement price (2,000,000*99)
Add: Accrued interest on 2,000,000
from April 1 to July 1, 2021
(2,000,000*12%*3/12)
Total Cash Payment
1,980,000
60,000
2,040,000
b. Carrying amount of bonds retired and loss on retirement
Bonds payable retired
Discount on bonds payable applicable
to the bonds retired
(2,000,000/5,000,000*75,000)
Carrying amount-July 1, 2021
Less: Retirement Price
Loss on early retirement on bonds
Oct. 1
Dec. 31
31
( 30,000)
1,970,000
1,980,000
( 10,000)
Interest expense
180,000
Cash
180,000
Interest expense
90,000
Accrued interest expense
90,000
(3,000,000*12%*3/12)
Interest expense
6,000
Discount on bonds payable
6,000
(3,000,000/5,000,000*20,000/ ½)
2)
Current Liabilities:
Accrued Interest payable
Noncurrent Liabilities:
Bonds payable
Discount on bonds payable
B.
2,000,000
90,000
3,000,000
( 60,000)
2,940,000
Star Company has outstanding a P6,000,000 note payable to an investment entity. Accrued
interest payable on this note amounted to P600,000.
Because of financial difficulties, the entity negotiated with the investment entity to exchange
inventory of machine parts to satisfy the debt.
The inventory transferred is carried of P3,600,000. The estimated retail value of the inventory is
P5,600,000. The perpetual inventory system is used.
REQUIRED: Prepare journal entry necessary on the books of Star Company to record the settlement of
notes payable.
Solution:
Notes payable
Accrued Interest payable
Total liability
6,000,000
600,000
6,600,000
Less: Carrying amount of Inventory
Gain on extinguishment of debt
3,000,000
3,600,000
Journal entry:
Note payable
6,000,000
Accrued Interest payable
600,000
Inventory
Gain on extinguishment of debt
MULTIPLE CHOICE (THEORY)
1.
3,000,000
3,600,000
The most common type of liability is
a. One that comes into existence due to a loss contingency.
b. One that must be estimated.
c. One that comes into existence due to a gain contingency.
d. One to be paid in cash and for which the amount and timing are known.
2. Which is not a characteristic of a liability?
a. It represents a transfer of an economic resource.
b. It must be payable in cash.
c. It arises from a present obligation to other entity.
d. It results from a past transaction or event.
3. Which of the following best describes the accrual approach of accounting for warranty cost?
a. Expensed when paid
b. Expensed when warranty claims are certain
c. Expensed based on estimate in year of sale
d. Expensed when incurred
4. Advance payments from customers represent
a. Liabilities until the product is provided.
b. A component of shareholder’s equity
c. Assets until the product is provided
d. Revenue upon receipt of the advance payment
5. An entity received an advance payment for special order goods that are to be manufactured and
delivered within six months. How should the advance payment be reported?
a. Deferred charge
b. Contra asset account
c. Current liability
d. Noncurrent liability
6. A provision shall be recognized for
a. Future operating losses
b. Obligations under insurance contracts
c. Reductions in fair value of financial instruments
d. Obligations for plant decommissioning costs
7. Provisions shall be recognized for all, except
a. Cleaning-up costs of contaminated land when an oil entity has a published policy that it will
undertake to take up all contamination that is causes.
b. Restructuring costs after a binding sale agreement
c. Rectification costs relating to products sold
d. Future refurbishment costs due to introduction of a new computer system
8.
The discount on bonds payable is reported as
a. A prepaid expense
b. An expense account
c. A current liability
d. A contra liability
9.
Most corporate bonds are
a. Mortgage bonds
b. Debenture bonds
c. Secured bonds
d. Collateral bonds
10. When an entity issued a note solely in exchange for cash, the present value of the note at
issuance is equal to
a. Face amount
b. Face amount discounted at the prevailing interest rate
c. Proceeds received
d. Proceeds received discounted at the prevailing interest rate
GOOD LUCK!!! PLEASE SUBMIT YOUR ANSWERS ON OR BEFORE JULY 22, 2021 ( 12N00N)